Owner? Manager? Employee?

Many of my clients are the owners and managers of their businesses and it is not unusual for an individual to wear three hats i.e. to be a shareholder, director and an employee. Each of the three roles can be viewed in isolation and  differing rights and obligations are attached to them. If you own the business, manage the business, and pay yourself as an employee then questions of status rarely arise.

However, what happens if the business is sold or merged, or in the worst case it  becomes insolvent? If you are no longer a shareholder or director, what about your rights as an employee? This was the issue before the Employment Appeal Tribunal (EAT) in the recent case of Secretary of State for BIS v Knight.Mrs Knight was the sole shareholder and Managing Director of Receptors Security Systems (UK) Ltd.  The company was incorporated during 1991 and ceased trading, as insolvent, on 18 October 2011. The issue before the EAT was whether Mrs Knight was an employee and therefore entitled to a redundancy payment from the Insolvency Service. Employees are entitled to such payments whereas shareholders and directors  are not.Mrs Knight produced an unsigned contract which confirmed her working hours would be between 9am to 5:30pm from Monday to Friday and she would be paid a salary of £20,000. As you can imagine, in circumstances where Mrs Knight would have approved and issued the contract it was not critical to the case one way or the other, especially when you consider that Mrs Knight also produced P60’s showing that she was paid £4728 during 2006/7, £11394 in 2008/09 and nothing in the final two years of trading. Mrs Knight explained that she paid herself whatever the company could afford and that in addition to paying the other employees and debtors, she reinvested any profits in the business.It is established law that one of the key factors which must be present to establish employed status is mutuality of obligations i.e. an obligation on the employer to provide work and an obligation on the individual to accept that work.

The case law on this point often focuses on consideration and whether there is an obligation to pay the individual. The Secretary of State argued that once Mrs Knight forfeited her pay there was no consideration and no mutuality of obligations could have existed between her and the company. Fortunately for Mrs Knight the EAT agreed with the decision of the original Tribunal that;”it was open to the Employment Judge on the evidence to reach the conclusion that Mrs Knight had not brought her contract of employment to an end, but had simply chosen not to enforce her entitlement to pay in order to keep the company afloat.“Accordingly, the fact that Mrs Knight was both a shareholder and a director and had not received any salary for two years was not decisive. The other factors pointed to an employment relationship and therefore Mrs Knight was held to be an employee and entitled to a redundancy payment of £7296.

James TwinePartnerHead of the Employment TeamTel: 01752 292351Email: jtwine@wolferstans.com

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